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Parol Evidence Rule Torpedoes Subcontractor’s Lawsuit Against Contractor

A recent Tennessee breach of contract case involving a construction contract should be required reading for all subcontractors who do work in Tennessee.  In all of the cases I have read over the years involving disputes between contractors and subcontractors about change orders, extras, and the scope of work, this case, Preston McNees Specialty Woodworking, Inc. v. Daniel, sums up as well as any the pitfalls that await subcontractors who perform extra work or work beyond the defined scope.

Here are the facts of the case:

  • Subcontractor was a woodworking company
  • Contractor was the general contractor on a construction project requiring the supply and installation of woodwork to a student center
  • In its bid, Subcontractor provided that “All wood items are sent to the field unfinished, ready to stain by others prior to installation”
  • Contractor selected Subcontractor to perform the work at the bid price of $95,000
  • Subcontractor entered into a standard AIA form contract with Contractor for the supply and installation of the woodwork
  • The subcontract provided that Subcontractor would perform the work according to the Project Manual and Drawings (which had been prepared by the architect)
  • The Project Manual required the woodwork to be stained in the shop
  • The AIA contract contained extensive language enumerating what documents were part of the contract: Subcontractor’s bid was not mentioned, but the Project Manual was
  • The AIA contract also contained an integration clause which provided that it was the entire and integrated agreement of the parties
  • After work began, Subcontractor submitted a change request to Contractor detailing an additional cost of $14,000 to stain and to finish the woodwork
  • The change order was never signed by Contractor
  • On August 11, 2011, Subcontractor submitted an interim pay application which included the original contract price and the $14,000
  • According to Subcontractor, Contractor never objected to the extra charges submitted on August 11 until Subcontractor had substantially completed its work in November of 2011

 

Subcontractor filed a breach of contract lawsuit against Contractor for the $14,000.   At trial, Contractor’s representative testified that it verbally informed Subcontractor on several occasions that it would not be paid the $14,000. Subcontractor denied this.

The trial court found for Subcontractor by employing the doctrine of equitable estoppel.  It found that Contractor was equitably estopped from asserting that it was not liable because it had waited until Subcontractor’s work was substantially completed before telling it that the extra charges would not be paid.

The Court of Appeals of Tennessee reversed the decision of the trial court, and found that Contractor was not liable.  It held that the parol evidence rule prohibited the trial court from considering any evidence (other than the terms of AIA contract) which contradicted the terms of the AIA contract which provided that the woodwork had to be stained and finished before being delivered to the job site.

How did the appeals court deal with the trial court’s use of equitable estoppel? Rather easily.  At least a couple of elements necessary to prove equitable estoppel were missing.  First, for that doctrine to apply, the Contractor would have had to have intentionally misrepresented or concealed a material fact.  There was no proof that Contractor had misrepresented or concealed anything according to the appeals court.  In order to use the defense successfully, Subcontractor also had to prove that it lacked the means to know the truth.  There was no evidence of that either said the appeals court.

First lesson: Especially when you are dealing with a contract as well thought out and as thorough as one drafted by the AIA, which contained a rock solid integration clause, do not expect that you will be paid for extras or work beyond the defined scope just because your bid is inconsistent with the terms of the contract.  Second lesson: Never expect to be paid for extras or work exceeding the defined scope of work where you have an AIA form contract unless you have a signed change order.  Even where you have a rudimentary written contract or a verbal contract, it is always worth it to have a change order or agreement about extras in a writing signed by the other party.